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Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so...

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Accounting

Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating-rate interest payments for fixed rates. Presently, she is paying per annum on

$5,100,000

of debt for the next two years, with payments due semiannually. LIBOR is currently

3.991%

per annum. Spread paid over LIBOR, per annum is

2.000%.

Heather has just made an interest payment today, so the next payment is due six months from now. Heather finds that she can swap her current floating-rate payments for fixed payments of

7.009%

per annum. (CB Solutions' weighted average cost of capital is

12%,

which Heather calculates to be

6%

per 6-month period, compounded semiannually).

a. If LIBOR rises at the rate of 50 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?

b. If LIBOR falls at the rate of 25 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?

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